Obama Team considering a pre-pack Auto bankruptcy

Bloomberg is reporting that Obama’s transition team is exploring a pre-packaged bankruptcy filing for the U.S. automakers as a solution to the stand-off in Washington (hat tip Scott). Apparently, Obama has some pretty savvy people in his transition team because they seem to be much more on the case than the Bush Administration when it comes to a solution for the Big Three Automakers. (Note: that Reuters has reported that Obama’s team denies investigating the pre-pack. You will see the story at the end of this post.)

President-Elect Barack Obama‘s transition team is exploring a swift, prepackaged bankruptcy for automakers as a possible solution to the industry’s financial crisis, according to a person familiar with the matter.

Obama’s team has already contacted at least one bankruptcy- law firm to say that Daniel Tarullo, a professor at Georgetown University’s law school who heads Obama’s economic policy working group, would call to discuss the workings of a so-called prepack, according to this person.

U.S. lawmakers yesterday postponed until December a vote on whether to give General Motors Corp., Ford Motor Co. and Chrysler LLC a $25 billion bailout as an alternative. Automakers such as GM could use court protection to reduce debt and reject unfavorable contracts.

“It creates the environment to deal with GM’s problems but limits government financial commitment,” said bankruptcy lawyer Mark Bane of Ropes & Gray in New York.

Tarullo referred the matter to the transition team press office. Team spokeswoman Stephanie Cutter said, “We have not put out anything specific for the auto industry except that something needs to be done immediately.”

GM, the largest U.S. automaker, said it might run out of cash as early as the end of the year and that the risk was even greater by mid-2009. GM Chief Executive Officer Rick Wagoner said this week GM would have to liquidate if it went into bankruptcy.

The automaker probably has weeks rather than months left before it runs out of money unless it gets federal aid, Jerome York, an adviser to billionaire Kirk Kerkorian and a former GM board member, told Bloomberg Television yesterday.

How Prepacks Work

In a prepackaged bankruptcy, an automaker would go into court with financing in hand after reaching agreement with lenders, workers and suppliers on what each would give up and on the business plan to be followed. The process might take six to 12 months, compared with two to five years if the automakers followed an ordinary Chapter 11 proceeding and worked out agreements under a judge’s supervision, Bane said.

Automakers would have to depend on government financing to restructure in bankruptcy court and probably couldn’t attract private loans until they were ready to emerge from the process, Bane said.

Officials of the three automakers told members of Congress this week that they had studied a pre-arranged bankruptcy, championed by Republican lawmakers such as Senator Bob Corker of Tennessee, before dismissing the idea as unworkable.

“We have looked at all aspects, whether it’s a prepackage, whether it’s prenegotiated,” Chrysler CEO Robert Nardelli told a Senate committee on Nov. 18. The options are all “more negative” than restructuring as a condition of receiving federal aid, he said.

My prayers have been answered and this is the kind of solution now being investigated by our new President-Elect and his team. I am duly impressed. I said two days ago in a post that a ‘pre-pack’ would be a very good solution.

The best result would be a pre-package Chapter 11 filing whereby the U.S. Government takes on some of the health care and pension burdens of the company and debt holders do a debt for equity swap. Management should be fired.

But, wait just one minute. Not everyone is on board, you see. Washington may screw this one up just yet. Apparently Congress is not buying the pre-packaged bankruptcy idea. Nor do GM and Ford’s head — could it be that they would be fired?

Prepacks Rejected

Wagoner and Alan Mulally, CEO of Dearborn, Michigan-based Ford, also said under congressional questioning that their companies had studied and rejected the idea of reorganizing under court protection.

House Speaker Nancy Pelosi said yesterday that Democrats reject bankruptcy as an option.

In or out of court, automakers will have to submit a viable business plan to gain government funds, Peter Peterson, senior chairman of Blackstone Group LP, said in an interview.

“Unless they can show us the plan, we can’t show them the money,” Pelosi said yesterday.

GM, Ford and Chrysler must submit viability plans by Dec. 2, and Congress would meet the week of Dec. 8 to consider aid, Senate Majority Leader Harry Reid said yesterday. Congress must see accountability from automakers, Pelosi said.

The congressional deadlock was triggered by disagreement over how to pay for the $25 billion the Big Three automakers are seeking.

Democrats’ Position

Democratic leaders have demanded that the recently approved $700 billion bank-rescue fund be tapped for the auto aid. Their plan stalled with opposition from Republicans and President George W. Bush‘s administration.

The Bush administration joined Levin, Missouri Republican Senator Christopher Bond and others pushing the alternative that would tap the fuel-efficiency loans instead.

While I am pretty excited that people are looking to solve this problem, it is discouraging that they are dragging their feet with bankruptcy looming. Congress needs to find a solution…and fast. Obama’s team is showing true leadership by taking this thing and running with it even before they get into office.

UPDATE 10AM ET: Reuters reports the claims about Obama’s team and the pre-pack are false. See the story below.

President-elect Barack Obama’s transition team is not exploring a prepackaged bankruptcy plan for U.S. automakers, officials from Obama’s team said on Friday.
Bloomberg News reported that Obama’s transition group was exploring the option.

“That’s not true,” said Tommy Vietor, a spokesman for Obama’s White House transition team.
Bloomberg reported that Obama’s team was considering a swift prepackaged bankruptcy for automakers as an answer to the financial woes of the sector, citing a person familiar with the matter.
According to the report, Obama’s team has already contacted at least one bankruptcy law firm to say that Daniel Tarullo, who heads Obama’s economic policy working group, would call to discuss the workings of a so-called “prepack.”

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator in print and on television for the past decade. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.